Retailiatory Strike

This story appears in the December 2002 issue of Entrepreneur. Subscribe »

In a world dominated by big-box retailers, it's easy to feel like David battling Goliath if you want to start an independent retail business. "Why bother?" you think. "I'll only get crushed." But your small size could save your business these days. "[Many big boxes] aren't as invincible as they once seemed. They've gotten so big and bloated," says Bob Phibbs, a Long Beach, California, small-business retail consultant and author of You Can Compete! The Retail Doctor's Tools to Doubling Your Sales. Another plus: Consumer spending and retail have remained strong through the economic ups and downs. Retail sales in 2001 totaled about $3.5 trillion, according to the U.S. Census Bureau, which compiles retail statistics.

Shopping today is about time and convenience, says Tom Buxton, president and CEO of The Buxton Company, a retail market research firm in Fort Worth, Texas, that represents more than 500 clients, including FedEx, Kinko's and Pier 1 Imports. "Successful retailers are focusing on lifestyles," he says.

Look around, and you'll see retail being integrated everywhere, from hospitals and revitalized downtown districts to new malls and trendy urban mixed-use centers that provide a sense of community by combining retail shops with residential and office space in compact acreage. There are already more than 400 mixed-use developments around the country, and the number of these projects on more than 15 acres that were under construction or completed increased 37 percent last year, according to New Urban News, a publication that covers planning and development trends.

The costs of establishing a permanent retail location, however, can be steep. You may spend up to $100,000 or more, with leases spanning from three to 10 years. Carts, kiosks and temporary space can be an easier way to get a foot in the door with a lot less risk. The upfront investment for a kiosk or a cart can range from $2,000 to $10,000, according to Patricia Norins, publisher of Specialty Retail Report, a quarterly trade publication for specialty retailers. Today, carts and kiosks are a $10 billion industry.

Flexibility is another advantage. License agreements for carts and kiosks are shorter and are usually renewed every month up to one year depending on the location. This arrangement makes it easy for entrepreneurs to "come in, try it out for a month, and if their product isn't working, they can shift to a new product line or close up shop and move to a new location," Norins says.

Here are a few entrepreneurs who used a single kiosk location as their launching pad into permanent space--and growing retail success.

Bag a Winner: Corda-Roy's Originals Inc.

Byron Young, 33, is founder and president of Corda-Roys Originals Inc., a 4-year-old Gainesville, Florida, company that makes high-end corduroy beanbags that convert into futonlike beds. His products sell for $79 to $379.

But in 1998, Young was a fledgling entrepreneur sewing beanbags in his garage. "I literally started with a few sewing machines and a table," he says. The idea for a corduroy beanbag came to him while he was driving around Gainesville in his favorite corduroy jacket. For some reason, beanbags flashed through his mind. Why not put the two together?

"It hit me in about 15 seconds that no one had jumped on the idea yet," he says. "Corduroy just seemed natural to me. It's nice and soft and kind of retro."

The idea that his beanbags could also be a bed occurred to him when some friends stayed over and he didn't have anywhere for them to sleep. He pulled out the soft, futonlike core of one of his beanbags as a makeshift bed for the night. "They woke up the next morning and thought it was the greatest thing since sliced bread," he says.

Young knew he was on to something, and things started to happen quickly. Before long, he was sewing up to five beanbags per day, selling them from his house and through a few local stores. Despite his lack of retail experience, he rented a location on the edge of a Gainesville highway. It turned out to be a bad decision. "Maybe five people came in all day long," he says. "The rent was cheap, but it was cheap for a reason." On the upside, he noticed that four out of five people who came into the store ended up buying a beanbag. "I thought if these numbers hold true, we should be able to make it in the mall," Young says.

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But he didn't know anything about mall retailing. All he knew was that his start-up funds were very limited. "I wanted the least expensive space in the mall," he says. "I wasn't even sure if I could handle the monthly payment on a kiosk, much less an in-line store."

He approached the manager of Gainesville's upscale Oaks Mall near the University of Florida campus about opening a kiosk. For Young, it was an affordable option with a much shorter lease than an in-line store, which would have required him to pay $3,500 per month in rent plus utilities and sign a minimum three-year lease. The two struck a deal. "I think he just felt sorry for me," Young laughs.

He spent $2,500 to open his first kiosk in 2000. Soon, Young was taking orders for more beanbags than he could possibly make by himself. With help from investor and partner John Gasser, 48, Corda-Roy's Originals has now grown to include 50 employees and two in-line stores in Florida, one in North Carolina and one in South Carolina. The company also has 12 kiosks dispersed throughout those three states, as well as in Indiana, Ohio and Tennessee. Company sales in 2001 were just under $2 million, and Young projects $3 million in sales by the end of the year.

But kiosks and carts present some unique challenges. Customers sometimes wonder if you'll still be around tomorrow if they need to return something. Displaying products in limited space and establishing a brand identity is also tricky. Passing shoppers "can't take everything in," Young says. It doesn't help matters that you're also battling showy window displays for consumers. How do you compete?

Attention, Shoppers! Explore what people look at, what they buy and in our interview with retail guruPaco Underhill.

Over the years, Young has learned how to show off his products. When he started out, he would display a few beanbags and a bed, but he found that customers didn't want to stoop down to touch them. So Young built a central platform to get a sample of his product off the floor.

Today, his kiosks are surrounded by six to 10 colorful beanbags on display. Vacuum-packed beanbags are also kept on-site for impulse buys, though customers can have their orders delivered. Young uses low-budget signs with single words and phrases like "new," "bed inside" and "try me," along with photos showing the beanbag-to-bed process. It has made a huge difference for his customers. "[Your marketing] has to be like a billboard you see on the side of the road," Young explains.

As a kiosk operator, you'll need to give consumers something interesting to do, says Arthur Gilmore, managing director of Interbrand, a New York City brand consulting firm. "How you stage your products makes a big difference," Gilmore adds. Dynamic, moving displays and product demonstrations will draw people's attention. Avoid a cluttered look and have business cards handy to lend credibility.

Also, create a Web site that includes a general description of your products, along with photos, product prices, return information, a list of locations and contact information, in addition to a general overview of your company and its mission.

Don't focus solely on price either, Phibbs says, because you'll never win against the big retailers who have latched onto the idea that price is everything. Instead, try creating a personalized experience heavy on good service. "Don't think like a big box," he warns. "Know who your customer is."

The Beauty of It All: Basin Inc.

At Basin Inc., a Bloomington, Minnesota, bath and body company co-founded four years ago by Randy Heninger, 38, and his wife, Shawna, 34, the focus is on creating a unique customer experience that can't be found at competing mall retailers such as Bath & Body Works, The Body Shop and Origins.

Basin's stores are modeled after an 18th-century mercantile shop. Weathered pine shelves and linen curtains decorate the stores, and customers can sort through metal tubs filled with the company's line of custom-made soaps, bath crystals, shampoos and facial treatments. They can fill up their own bath salt tubes and make their own candles. Basin employees even hand-cut soap pieces for customers from natural soap blocks. "It's very hands-on," Randy says. "We're learning as we go along."

The concept is working: Basin is bringing in $1,000 per square foot
in yearly sales, and the company has already reached $1 million in sales annually. Today, the couple operates two in-line stores at the Mall of America in Bloomington and at the Disneyland Resort in Anaheim, California.

But the Heningers' success in retail started with a single kiosk. They were both working for the IRS in Utah in the early 1990s--and tiring of it--when a friend in Dallas, who was running a successful key chain and magnet kiosk, suggested they break into the retail business. They opened a similar key chain and magnet kiosk in the Mall of America in 1992, signing a one-year lease and paying $1,500 per month in rent.

Starting with a kiosk meant less inventory to carry and less stress knowing their lease wasn't locking them in for years if their idea didn't work. Learning about retail on a smaller scale "was worth it," Randy says. In their first year of business, they had the second-highest sales of the mall's 50 kiosks.

They opened an additional kiosk in the Mall of America, and by 1994 they had three other kiosk locations in tourist malls in Fort Lauderdale, Las Vegas, and in Canada's West Edmonton Mall, the biggest mall in the world. They also opened in-line magnet stores in Myrtle Beach, South Carolina, and Ontario, California.

By 1997, the couple began to look for a new business concept because the magnet and key chain business came with some downsides: Margins are low, and once people buy a magnet or key chain, they don't need another for a while. After gaining retail experience, they decided to make the switch to bath and beauty, where consumers spend a lot of money and replenish their supplies regularly.

Basin was finally born in 1998 after a year of careful planning. The Heningers sold their magnet and key chain business and signed a $3,500 per month, one-year lease to move into a temporary, 500-square-foot in-line space in the Mall of America to test their bath and beauty concept. The mall provided color schemes, signage and merchandising, which was "a big help," Randy says.

Eventually, the couple signed a five-year lease and upgraded to a 750-square-foot permanent in-line space in the mall. Starting with temporary space eliminated some onerous construction costs. "It's expensive to open a permanent store," says Randy, who paid $100,000 in costs, from fixtures to merchandise, to bump up to a permanent location. Starting with a kiosk was the right move. "It taught us how to run a business when we had no clue," he says. "If we had started with an in-line space, it would have been a lot harder."

But do some research before you leap into retail. Make it a point to ask shop and kiosk owners at your target location how they're doing before you sign a lease. Mall managers aren't fond of tenants dishing the dirt, but it's the only way to find out things you may not learn otherwise about a mall's foot traffic, rental rates, marketing plan, security problems and repair issues. "It's amazing what [tenants will] tell you," Randy says. "It doesn't hurt to ask."

Negotiating the lease can be a daunting process. But mall developers are willing to work with new retailers, Norins says. One place to save money is in your overage rent--the percentage of sales a mall takes when you sell over a certain amount each week. Don't be afraid to ask for extras that might lead to cost savings. "Say 'Look, I really need your help these first couple of months,'" says Norins. "[Mall developers] might say they won't charge you any overage rent, or they might throw in a free week at the end of the two months."

Will kiosks or temporary space work for your independent retail business? It's a good time to find out. David went head-to-head with Goliath and won. You can, too.

Make No Mistake

Beginning retailers make a lot of mistakes. Here are five of the biggest:

1. Not doing a reality check. Do you have the temperament it takes to succeed in retail? "One of the biggest mistakes people make is thinking that retailing is going to be one way, and their experience turns out to be very different," says Daniel Butler, vice president of retail operations for the National Retail Federation in Washington, DC. "They're not realistic about the challenges." Retail is a lifestyle choice. Can you hack it? Butler suggests working part time in retail for a few months to find out before you start your business.

2. Failing to research. Surprisingly, many beginning retailers don't develop a business plan and marketing plan. "When someone comes to me and says 'This is the research we've done, this is why we feel this product will sell and why we'll be successful in this location,' it gives me a greater comfort level [in talking further]," says Courtney Lackey, a general manager with Jones Lang LaSalle, a property management leasing company that manages retail properties.

3. Creating clutter. In retail, you're branding from day one. If your product displays have no rhyme or reason, customers have no reason to stop and shop. "The biggest mistake a cart or kiosk retailer can make is putting [out] too much merchandise," Lackey says. "Something that's well-displayed, colorful and catches your eye attracts customers."

4. Competing with big-box retailers. Face it, as an independent retailer you'll never beat WalMart on price. But a lot of small retailers fall into the price trap of trying to compete with the big boys--a big mistake, says Bob Phibbs, a retail consultant in Long Beach, California. Instead, focus on your edge as a small retailer: customer service and a unique consumer experience.

5. Choosing the wrong location. The rental rate may be great, but if the location doesn't draw people, you might be in trouble even if your product is good. Where are shoppers seeking your type of product going? What types of big-box retailers complement your product and will drive traffic your way? One no-cost way to find out is by sitting in a mall and watching the traffic flow. "If you decide you want upscale people, look at where they're already shopping and how you'd get that market," Phibbs says. "Know all these things {before} you start to sign leases."

Check It Out
It's hard to believe, but many small retailers are still using calculators and electronic cash registers to ring up sales, only to transfer all this data manually to a computer at the end of the day. Why not think about setting up an integrated retail POS software system before you start your business? You have lots of options to choose from. Some major players in this specialized space include , PeopleSoft and Oracle. Here are just a few products on the market:

• BizTracker: This POS software can run by keyboard or touchscreen and integrate with QuickBooks. In addition to serving as a computerized cash register, BizTracker can track commissions on sales, create electronic and print packing slips. Street price: $995 (one workstation); $1,280 (three-station network).
• ComCash: This Windows-based, Dell-partnered program allows you to import all your QuickBooks customers, inventory and vendors. It also comes pre-installed with POS, polling, communication and credit card software. You can take the program for a test drive by downloading a ComCash POS demo at www.comcashpos.com/download_new.htm. Street price: $1,099 (single-station install).
• QuickBooks Point of Sale Software for Retailers: Designed especially for single-store retailers, this program integrates with QuickBooks 2002 financial software, turns your PC into a cash register and can be customized. Another benefit: You can buy it off the shelf at Office Depot and Sam's Club. Street price: $1,299 for the software/hardware bundle (includes a bar code scanner, a receipt printer, a cash drawer and a credit card swipe); $799 for the software alone.
• QuickSell 2000: Lets you export data to Windows-based accounting programs such as Peachtree Accounting, M.Y.O.B. and Quick Books, and you can run it on a growing network. Here's an added bonus: Microsoft bought QuickSell in May and is now integrating its features with other Microsoft POS products to offer a complete a small-business POS software package. Street price: starts at $990.